ATO tax debt refers to the outstanding tax liabilities that businesses owe to the Australian Taxation Office (ATO). This can include unpaid GST, PAYG withholding, income tax, and other tax obligations. Accumulating ATO tax debt can occur due to various reasons such as cash flow issues, underestimating tax liabilities, and the complexities of tax compliance.
When businesses fail to meet their tax obligations on time, they will incur penalties and interest charges, further increasing their debt burden. Managing and clearing ATO tax debt is crucial for maintaining financial stability and avoiding severe consequences. As of December 2023, small businesses in Australia owed approximately $34.1 billion in tax debt, accounting for 65% of the total collectable debt.
Causes of ATO Tax Debt Accumulation
Small-to-medium sized businesses in Australia primarily accumulate debt with the ATO due to:
- issues managing cash flow
- underestimating tax liabilities
- complexities of tax compliance
- struggling with timely payments of GST, PAYG withholding, and income tax
Two other ways businesses can accumulate tax debt are if they treat withholding tax as revenue for the business or there is fraud committed by employees.
The COVID-19 pandemic exacerbated the tax debt issue, as businesses deferred tax payments to manage immediate financial pressures. Some businesses may also inadvertently over-claim deductions or omit income, further increasing their tax liabilities.
Olga Koskie, Director at Tax Assure, notes “Many businesses underestimate their tax liabilities, leading to significant accumulations of debt. It’s crucial for business owners to maintain a proactive approach to their tax obligations.”
Certain business types may be more susceptible to accumulating ATO tax debt, including, construction, retail, wholesale and manufacturing. These sectors typically have fluctuating income streams, making it challenging to maintain consistent tax payments. Moreover, businesses with complex supply chains or those heavily impacted by economic downturns are also at greater risk of falling behind on their tax obligations.
Increasing importance of clearing ATO debt promptly
Recent changes in the ATO’s approach have made it more critical than ever for businesses to address their tax debts promptly. During the COVID-19 pandemic, the ATO may have been more flexible with tax debt collection, often allowing some businesses to defer payments to stay cash flow positive.
“While these measures were necessary during difficult times, they have created long-term issues with tax debt that require our immediate attention,” Olga emphasises.
However, with the ATO resuming its normal debt collection activities, timely tax payments have become essential for maintaining financial health. Olga also highlights the urgency of addressing these issues: “Recent changes in the ATO’s debt recovery efforts underscore the importance of addressing tax debts promptly. Businesses cannot afford to ignore their tax obligations, especially with intensified recovery actions now in place.”
Some of the ATO’s recovery actions include:
- Reporting businesses with outstanding debts to credit reporting agencies
- Issuing garnishee notices, allowing the ATO to directly withdraw funds from a business’s bank account
Antony Resnick, Partner at dVT Group, states “The ATO has also increased the issuance of Directors Penalty Notices (DPNs), which hold company directors personally liable for unpaid tax debts.”
DPNs are a tool used by the ATO when a company fails to meet its tax obligations and are issued to the directors requiring them to pay the outstanding amounts. There are two types of DPNs:
- Standard DPNs – Directors have 21 days to repay the outstanding sum or enter administration, liquidation or small business restructuring. “In addition, a non-lockdown DPN comes into effect when the BAS is lodged but remains unpaid after more than three months,” notes Antony.
- Lockdown DPNs – Directors are automatically liable for the debt if it remains unpaid, or BAS returns are not lodged, after three months and cannot be remitted even after winding-up proceedings.
“It is better to submit your BAS on time, than to lodge it late, even if you cannot afford to pay the amounts due in terms of the BAS,” offers Antony. “If a DPN is then issued, it is a non-lockdown DPN and there are remedies available, including borrowing funds to pay the debt and get your business back on track.”
The issuance of a Lockdown DPN can have severe implications for a business. It can trigger insolvency proceedings, leading to the liquidation of the company. This not only affects the business’s operations but also impacts the directors’ personal finances and creditworthiness.
“A non-lockdown DPN, if not addressed in a timely manner, will become a personal liability of the director and could lead to insolvency of the director and puts in jeopardy personal assets such as the family home,” explains Antony.
The increase in DPNs has contributed to a rise in business liquidations in Australia, highlighting the importance of addressing tax debts promptly. In 2023-24, over 26,000 DPNs were issued by the ATO, an increase of 50% on the previous year.
Working capital solutions for managing tax debt challenges
To manage these cash flow challenges, businesses can benefit from working capital finance solutions. Octet offers a tailored Term Loan product, as part of the Debtor Finance and Trade Finance facilities, that can support businesses to pay off ATO debt. Whilst the ATO offers repayment plans for tax debt, the current (October-December 2024) General Interest Duty for late payments is 11.38% (compounded daily). Octet’s Term Loan is a flexible financial solution that provides the necessary funding to:
- Clear tax obligations and avoid penalties
- Enhance cash flow
- Improve creditworthiness
- Focus on growth and operational efficiency
Addressing ATO debts promptly not only helps maintain financial stability but also ensures that businesses can continue to thrive in a competitive market. “By securing tailored financial solutions, businesses can clear their ATO debts and focus on what they do best – growing their business,” says Olga.
Beyond paying off ATO debt, Octet’s Term Loan can be used for various other business needs:
- Invest in assets, plant, and machinery: Grow your business by securing additional space or investing in equipment.
- Manage operational costs: Cover everyday expenses such as payroll, inventory, rent, and utilities.
- Retire existing debt: Improve cash flow and creditworthiness by paying off new and existing debts.
- Consolidate loans: Simplify repayments, reduce interest, or decrease monthly payments with competitive rates.
Apply for an Octet Term Loan today
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Explore our Trade Finance and Debtor Finance solutions and see how we support businesses in sectors such as construction, retail and wholesale.
Olga Koskie is a lawyer and business advisor with more than 20 years’ experience. Tax Assure is a specialist tax debt advisory firm, working with the ATO and state revenue offices to support the management of accumulated tax debt.
Antony Resnick is a Partner at specialist accounting and advisory firm, dVT Group. He is a Registered Liquidator with over 35 years of local and international experience in liquidation, bankruptcy and insolvency.
Disclaimer: These comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice. Sources and references include: Australian Taxation Office (ato.gov.au), Australian Small Business & Family Enterprise Ombudsman (asbfeo.gov.au), ABC News (abc.net.au), Accounting Times (accountingtimes.com.au)
